Research On The Asymmetric Effect Of Interest Rate Policy On Stock Market Volatility

Along with the deepening of China’s financial reform, China’s monetary authorities gradually transfer the intermediate goal of monetary policy from the money supply to the interest rate, combining with China’s specific national conditions and the international advanced experience. In this case, research of the impact of interest rate on the stock market has significant practical significance. Speaking from the macro level, the monetary authorities can affect fictitious economy through interest rate adjustments so as to provide a stable financial environment for the development of the domestic industry. At the micro level, realizing the relationship between interest rate and stock markets correctly in different parts is useful to investors which allowing them to achieve a reasonable investment, risk aversion and capital appreciation.We use the SSE Composite index return rate and the gem index return rate on behalf of the main board market and the GEM market in China. And we also use SHIBOR-7days daily interest rate as the represent of interest rate changes, which includes 1324 samples from June 1st, 2010 to December 31 th, 2015.We found that the EGARCH model fits the volatility of the return rate of SSE composite index well, as well as the TGARCH fits the volatility of the return rate of the GEM index by analyzing the characteristics and volatilities of data.Basing on the previous text, we introduce the current interest rate as an exogenous variable into the GARCH model in order to evaluate the impacts which is produced by the changing of interest rate to the main board market and the GEM market in China. The result shows that the coefficients of the variables of variance equation and the mean equation appear significant on EGARCH model after introducing the current interest rate as variables. Leverage effect exists and the coefficient is negative, indicating that a negative impact is stronger than the positive impact to the fluctuation of the return rate of SSE Composite Index. At the same time the coefficient of the exogenous variable of interest rate is positive which indicates the stock index volatility and the exogenous variable are positively correlated. It also indicates that a rise in interest rates will increase the volatility of the return of SSE Composite Index and vice versa. As for the return rate of GEM index, the result of the introduction of the current interest rate is not significant in TGARCH model as long as EGARCH model. Using the same method, we introduced lag period interest rate into the model, founding that both the SSE Composite index return rate and the GEM index returns on lagged interest rate for the period 5 are significant and coefficients are positive, illustrating the presence of substantial lag effect in the transmission of interest rate.By analyzing the empirical results, we got the following conclusions: Firstly, the main board market in our country is more sensitive to changes in interest rates, noting that the impact of interest rate policy on the stock market has a certain limit. Secondly, the existence of time lag effect shows that the interest rate transmission mechanism is not smooth enough. Lastly, because of the leverage effect, "bad" news exacerbated the volatility of the stock market which explains the reason why there are more crash phenomenon in China’s stock market.Finally, combining all the conclusions above, we proposed policy recommendations from the following 4 aspects: the establishment of the multi-level financial market with perfect stock market information disclosure mechanism and risk management system, promoting the reform of market-oriented interest rate, reducing the extent intervention of government, and the education of investors. We hope the recommendations could r have certain guiding significance in reality.